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Ukraine vs Russia: the politics of an energy crisis

Alexander Motyl
17 January 2006

2006 began dramatically for Ukraine. On 4 January, Kyiv (Kiev) and Moscow signed a deal that ended their increasingly acrimonious gas dispute and resumed Russian gas supplies to Ukraine and Europe. Barely one week later, on 10 January, the Rada (Ukraine’s parliament) voted to dismiss the government of prime minister Yuri Yekhanurov, ostensibly for having agreed to unfavourable terms in the gas deal. In turn, President Viktor Yushchenko called the vote unconstitutional and vowed to continue with the current government until parliamentary elections on 26 March.

The gas explosion

The row over Russian gas supplies to Ukraine had been brewing throughout 2005. In summer 2004, Russia had agreed to unusually low gas prices – $50 per thousand cubic meters – in order to tip the balance in favour of Viktor Yanukovych, its candidate in Ukraine’s presidential elections. But Ukraine’s voters preferred the democratic opposition’s Yushchenko, and subsequent regime efforts to falsify the election results sparked the “orange revolution” that brought Yushchenko and his then ally, Yulia Tymoshenko, to power.

Alexander Motyl is professor of political science and deputy director of the Center for Global Change and Governance at Rutgers University, New Jersey. Among his books are Dilemmas of Independence: Ukraine after Totalitarianism (1993) and Imperial Ends: the decline, collapse, and revival of empires (Columbia 2001).

Also by Alexander Motyl on openDemocracy:

“How Ukrainians became citizens”
(November 2004)

“Democracy is alive in Ukraine”
(September 2005)

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Although Yanukovych lost the election, the biggest loser was Russia’s president, Vladimir Putin. Democracy was clearly making inroads in his self-proclaimed sphere of influence, Ukraine appeared to have been “lost”, and Russia was saddled with a ridiculously low gas price that it granted only to vassals, such as Belarus. Small wonder that Russia’s state-controlled gas monopoly, Gazprom, insisted on renegotiating the price upwards. Small wonder as well that Ukraine’s new orange government, recognising a good deal when it saw one, insisted on retaining the terms of the 2004 contract.

By mid-December 2005, with no revised agreement in sight, Gazprom upped the ante, telling the Ukrainians that, unless they accepted a fivefold price increase, it would cease pumping gas to Ukraine as of 1 January. Yushchenko refused, insisting that a gradual increase in the price, introduced over several years, was the only equitable and economically non-damaging way to proceed. Gazprom ignored his arguments and, as promised, reduced gas flows on new year’s day. Resulting gas shortages in Europe immediately led to howls of protest and a hasty retreat by Gazprom. Soon thereafter, Kyiv and Moscow announced a deal that doubled the price of gas and raised Ukraine’s transit fees.

At first greeted as a breakthrough that would stabilise gas prices and transit fees between Ukraine and Russia for five years, the agreement was soon revealed to be full of holes.

For starters, the deal made a shadowy Russian-controlled company, RosUkrEnergo, the sole supplier of gas to Ukraine. Since there was no rational economic reason for its inclusion in the deal, it was hard to escape the conclusion that RosUkrEnergo’s only role was to enrich corrupt Russian oligarchs. Worse, RosUkrEnergo’s monopoly status vis-à-vis Ukraine appeared to make Ukraine hostage to a criminal undertaking.

Finally, what was initially touted as a five-year arrangement turned out to be a six-month deal to provide Ukraine with gas priced at $95 per thousand cubic metres. That not only portended a renewed Russian-Ukrainian gas dispute in June 2006, but it also provided the Ukrainian government’s domestic critics with ammunition. How could it have agreed to a six-month price on gas, they argued, while fixing transit fees for five years? Naturally enough, Ukraine’s government argued that the deal was the best it could get.

The government’s dismissal

The gas deal served as the immediate pretext for the Rada’s vote to dismiss the Yekhanurov government. But more was obviously at issue here. With parliamentary elections scheduled for 26 March, all political parties have begun jockeying for advantage. And the gas quarrel makes all of them look bad. Yushchenko can legitimately be criticised for agreeing to questionable terms. Tymoshenko can be faulted with having neglected to anticipate the crisis in the months before September 2005, when she was sacked. And Yanukovych can be accused of naively claiming that Ukraine’s interests are best served by a strong alliance with a Russia that, as the dispute made amply clear, views Ukraine with hostility. Dumping Yekhanurov was a convenient way for Tymoshenko and Yanukovych to try to shift all the blame to Yushchenko and divert attention from their own failings.

Complicating things even more, the Rada’s move to dismiss the government was made possible by a constitutional framework that only went into effect on 1 January. Accordingly, Ukraine’s presidential system became a mixed presidential-parliamentary one. While the president previously had the sole right to appoint the prime minister and cabinet, under the new terms the parliamentary majority would appoint the prime minister and certain ministers, while the president would appoint others. That dilution of presidential power, which had been agreed to during the orange revolution, was the price Yushchenko had to pay for the old regime’s acquiescence in its own demise.

The problem was that, while the new constitutional framework appeared to endow the current Rada with the authority to dismiss a cabinet, it did not yet authorise it – or the president – to appoint a new one. Some Ukrainian analysts had warned that introducing the constitutional arrangement three months before a parliament endowed with the constitutional right to appoint a prime minister was to be elected could spell trouble. It would be unclear just what the current Rada’s prerogatives were in this interim period, and that lack of clarity could lead to tensions with the president, whose own prerogatives were equally unclear.

Although the consensus among experts in Ukraine appears to be that the current Rada overstepped its authority in voting to dismiss Yekhanurov – a view that Yushchenko and his supporters heartily endorse – the fact is that no one knows for sure. Worse, the only body that could make a final determination, the constitutional court, is short of several members and therefore cannot itself make a definitive ruling.

In all likelihood, the standoff between the Rada and the president will continue until the March elections. At the same time, the current government will probably continue to function, whether in its full capacity or in some caretaker role. Major policy initiatives are almost certainly not going to take place in this time, and that means that Ukraine’s accession to the World Trade Organisation will probably be delayed. On the other hand, the chances of bold policy initiatives taking place in a pre-electoral environment were probably slim anyway.

As far as the condition of Ukraine’s democracy is concerned, the news is better than it seems at first glance. While squabbling politicians may do little to promote democratic reform, squabbling politicians are, in the final analysis, what democracy is about. Democracy’s supporters may be consoled by Ukraine’s close resemblance to two of its neighbours in east-central Europe – Poland and Hungary – where the rough-and-tumble of democratic politics always appears to get in the way of effective governance. More important, although the first three months of 2006 will be a constitutionally confusing time, Ukraine’s political actors are all playing by the democratic rules of the game.

The March elections

At present, there are three main players and their electoral blocs – Yushchenko’s Our Ukraine, the Yulia Tymoshenko Bloc, and Yanukovych’s Regions of Ukraine party. Although Yanukovych is currently leading in the opinion polls with about 30%, all three will probably win comparable shares – plus or minus 25% – of seats in the elections. As a result, the next government will almost certainly be formed by a coalition of any two of these players.

Programmatically, Yushchenko and Tymoshenko remain closest, as they share a more or less equal commitment to democracy, market economics, and a pro-western foreign policy. Personal tensions and intemperate criticisms provoked by the gas brawl may have precluded such an alignment, but political interests generally trump personality in politics, so that this outcome is still most likely. It is also the option with the best chance of being stable.

That said, the two other variants are also conceivable. Yushchenko had signed a truce with Yanukovych in September 2004, in order to get his party’s support for Tymoshenko’s successor as prime minister, Yekhanurov. Although Yanukovych’s party voted to dismiss the government on 10 January, thereby leading Yushchenko to abrogate their earlier truce, a Yushchenko-Yanukovych coalition is surely still possible. Equally possible is a coalition between Tymoshenko and Yanukovych. The two joined forces with the communists to vote down Yekhanurov’s government, and this action may herald a willingness to cooperate in the aftermath of the election.

Regardless of who forms the government in March, it’s quite possible that it will be short-lived, leading to new parliamentary elections soon thereafter. If that happens, Ukraine could then embark on a period of shifting and unstable coalition governments and frequent elections. That’s not good news, but neither is it necessarily bad. Repeated elections and the possibility of serving in a governing coalition could have the institutionally salutary effect of compelling Yanukovych to commit, finally and practically, to the democratic rules of the game.

What it all means

As Ukraine’s confusing domestic politics sort themselves out in the months ahead, it will be worth remembering that Russia’s behaviour in the gas dispute – and not domestic politics in Ukraine – will have the most far-reaching consequences for Ukraine, Russia, and Europe.

Although Gazprom effectively underscored just how dependent Ukraine’s economy is on Russian gas, that’s no news. Rather more significant is that both Gazprom and the murky provisions of the 4 January deal made it clear that gas prices will keep rising.

At first glance, that sounds like terrible news for Ukraine. And indeed, continued price hikes will reduce GDP growth, raise unemployment, and increase inflation in the short term. But the medium-term impact is all to Ukraine’s – and possibly Yushchenko’s – good. Ukraine wastes prodigious quantities of energy, and artificially low gas prices are the major reason. Low prices also feed corruption. Not surprisingly, the greatest opposition to higher gas prices comes from the corrupt oligarchs in Ukraine’s Russian-speaking eastern rust belt. With Russia and Gazprom insisting that prices go up, Yushchenko should be able to plead force majeure, while Ukraine’s oligarchs will have to acquiesce – and begin investing in more energy-efficient plants.

Russia’s negotiating behaviour has also dispelled illusions about its feelings toward Ukraine. No friend or partner would threaten a neighbour with a fivefold price increase in the dead of winter. Ironically, not only did Russia thereby undercut its closest Ukrainian ally, Yanukovych, who was embarrassingly silent for most of the clash of views, but it may also have helped consolidate the orange version of Ukrainian national identity.

Until now, Ukraine’s population has been roughly divided into three segments:

  • the orange half supports democracy and the market, and leans toward the west; these voters will feel vindicated by Russia’s behaviour
  • an ethnic Russian quarter is opposed to democracy and the market, and thinks that an independent democratic Ukraine is, and always has been, a bad idea; these voters will also feel vindicated by Russia’s behaviour
  • another quarter consists of Russian-speaking ethnic Ukrainians who have generally sided, though not unconditionally, with the Russians in their voting patterns; this third group will now split, with a significant portion probably concluding that it’s time to resist Moscow’s bullying by joining forces with the orange Ukrainians.

While there is a silver lining in the gas feud for Ukraine, there is none for Russia and Russians. The dispute showed that Russian elites view their country as a great power entitled to pursue regional hegemony by means of the crudest forms of 19th-century Realpolitik. Russian defence minister Sergei Ivanov minced no words in making that point amply clear in a recent op-ed piece (“Russia must be strong”, Wall Street Journal, on 11 January 2006).

The gas controversy, seen in this light, was rather less about the price of gas than about Russia’s aspirations to regional domination. And indeed, Ukraine was not the only victim of Moscow’s bullying. Gazprom also shut off gas supplies to Moldova and raised the price for Georgia. Energy has clearly become a political weapon in the hands of a Russian president who recently bemoaned the Soviet Union’s collapse – and not, say, two world wars, Stalinism, or the holocaust – as the greatest tragedy of the 20th century.

Trading democracy for gas

The news gets worse. Not only is Russia acting like a regional bully, but it has also become an authoritarian state whose elites carefully cultivate hyper-nationalist sentiments within the population. Putin has progressively dismantled the creaky democratic institutions he inherited from Boris Yeltsin, silenced the media, imposed severe limitations on non-governmental organisations and civil society, and extended state control over significant segments of the Russian economy.

The 4 January gas deal revealed that a consortium of Putin, Gazprom, and RosUkrEnergo had successfully imposed its terms on Ukraine. In effect, the deal showed that Russia is ruled by a dictator in cahoots with “big gas” and the oligarchs, and that Russian democracy is dead. That most Russians support Putin’s policies is, alas, only more cause for alarm.

Also on openDemocracy about Ukraine, Russia, and foreign policy:

Alena V Ledeneva, “How Russia really works” (January 2002)

Sergei Markov & Robert V Daniels, “America’s Russian question” (October 2004)

Ivan Krastev, “Ukraine and Russia: a fatal attraction”
(December 2004)

Katynka Barysch & Charles grant, “Ukraine should not be part of a ‘great game’” (December 2004)

Ivan Krastev, “Russia post-orange empire” (October 2005)

Mary Dejevsky, “Russia’s NGO law” (December 2005)

The gas dispute has thus confronted Europe with some awkward realities. Just as the orange revolution of late 2004 had demonstrated that Ukraine possessed democratic, pro-western aspirations, the gas argument of early 2006 showed that Ukraine is a real country that is here to stay.

The gas dispute also demonstrated that Ukraine’s problems – and especially its problems with Russia – are also Europe’s problems. Since Ukraine will not go away, Europe has no choice but to involve itself more actively in the resolution of Ukraine’s domestic and especially its foreign policy challenges. As many European analysts have argued, the European Union must finally recognise that it needs to develop a long-term policy toward Ukraine that is consistent with European values and Ukrainian aspirations.

That need not mean extending an invitation to Ukraine to join the European Union, but it does mean telling the Ukrainians – clearly and in no uncertain terms – that, if and when they meet all the requirements for membership, they will be welcome to apply. Such a signal imposes no costs whatsoever on the EU, while telling the Ukrainian public that continued democratic progress could, at some undefined point in the very distant future, lead to integration into Europe.

No less important, the gas feud showed that Europe can no longer pretend that Russia is a benign state or – as former German chancellor, Gerhard Schrőder, said of Putin at the height of the orange revolution – that the Russian president is an “impeccable democrat”. Russia’s behaviour during the dispute effectively demonstrated that Russian elites have no interest in integrating into Europe, playing by European rules, and sharing European values.

No modern European country would, even if contractually justified, threaten a neighbour with depriving it of a vital natural resource. Europeans will now have to determine just how they can balance their own commitment to human rights, the rule of law, and democracy with their dependence on Russian gas and their desire to live amicably with Moscow.

European policy toward Ukraine – a country that the European Union had preferred to ignore until the orange revolution made that impossible – will be the test of Europe’s ability to reconcile these opposing priorities. It should now be clear that Russia is authoritarian at home and hegemonic abroad. It should be equally clear that Ukraine is democratic at home and pro-western abroad. Critics of the United States invasion of Iraq questioned the legitimacy of trading blood for oil. Observers of European policy may wonder about the legitimacy of trading democracy for gas.

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